Indian Observer Post
Mumbai, 22 May 2019: In its first monthly credit market tracker, India Ratings and Research (Ind-Ra) has analysed systemic liquidity and its likely impact on the debt capital market. The tracker highlights the potential themes impacting the credit market and provides an update on the performance of the debt market.
In addition, the tracker highlights movements in issuances and yields of financial institutions (banks, wholesale and retail non-banking financial companies (NBFCs), and housing finance companies) and non-financial institutions (corporates) and provides insights into short-term corporate money market instruments.
The tracker will help lenders and investors in understanding the key short-to-medium-term trends and challenges in the debt capital market.
Key Highlights – April 2019
Continued Risk Aversion
- The system liquidity deficit remains high (average INR1 trillion deficit in April 2019) owing to a sustained rise in the currency in circulation, largely due to the elections and unstable foreign portfolio flows. This situation has come at a time when the incremental appetite of mutual funds for CPs has remained subdued, marked by an overall stagnant AUM for nearly six months ended March 2019. Hence, refinancing could pose challenges to entities with credit profiles, especially low-rated NBFCs/housing finance companies (refer to slides 2 and 4).
- In Ind-Ra’s opinion, risk aversion has further intensified in the system, which is underpinned by a spike in CP yields on the short end of the curve for the past few months (refer to slide 9). A detailed analysis of the issuance data indicates a rise in the quanta of issuance and borrowing costs for short-tenure CPs by NBFCs (refer to slide 10). The rise could materially increase the refinancing risk for low-rated issuers, once their CPs reach maturity.
Short-Term Borrowing Cost Stays Elevated
- CP issuances have receded since January 2019, though the short-term median CP yield has increased by 75bp-100bp. CD issuance has witnessed some traction, partly due to the pressure of deposit accretion and financial year-end (FYE19) (refer to slide 6).
- The exposure of mutual funds to NBFCs has shown some signs of improvement, albeit the recovery is confined to only large housing finance companies and public sector units. In the medium-to-small-scale bucket, there has been no material revival in exposure compared with the pre-September 2018 level (refer to slide 11).
In Ind-Ra’s opinion, the ongoing risk aversion will persist in the foreseeable future; however, adequate liquidity in the banking system will be necessary to alleviate such disruption. The agency expects the system liquidity to turn surplus in June 2019. The RBI’s communication and strategy to address excess liquidity will be the key to rate transmission.
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